Michigan Laws for Tipped Employees

Do you earn tips? Plenty of employees in Michigan do, including those who wait tables, serve and mix drinks, open doors, carry luggage, clean hotel rooms, or provide other services, from moving furniture to delivering newspapers. In fact, some employees earn more in tips from satisfied customers than in straight wages paid by their employers.

When you receive tips as part of your compensation, your legal rights under wage and hour laws become a bit more complicated. The rules about what counts as a tip, how much your employer must pay you, and whether you have to contribute to a tip pool (among other things) all depend on the laws of your state. Although federal law also covers these issues, employers must follow whichever law—federal, state, or even local—is the most generous to employees.

Here's what you need to know about federal and Michigan legal protections for employees who receive tips. You can find out more about Michigan minimum wage, tip rules, overtime standards, and other wage and hour issues at the Michigan Department of Licensing and Regulatory Affairs.

Tip Basics

The basic rule of tips, under federal law and state law, is that they belong to the employee, not the employer. Employers may not require employees to hand over their tips unless one of these exceptions applies:

State law allows the employer to take a tip credit. Some states allow the employer to count all or part of an employee’s tips towards its minimum wage obligations. Although the employer doesn’t technically “take” the employee’s tips, the employer gets to count some tips as if the employer had paid them directly to the employee. Michigan allows a tip credit, as explained below.

The employee is part of a valid tip pool. Under federal law and in most states, employees can be required to pay part of their tips into a tip pool to be shared with other employees.

Tip Credits

Minimum wage laws protect all employees, whether or not they receive tips. Employees are entitled to earn the full minimum wage per hour as set by federal law, or if higher, state law. Currently, the federal minimum wage is $7.25 an hour. The minimum wage in Michigan is $9.25 an hour, as of January 2018.

Under federal law and in most states, employers may pay tipped employees less than the minimum wage, as long as employees earn enough in tips to make up the difference. This is called a "tip credit." The credit is the amount the employer doesn't have to pay, so the applicable minimum wage (federal or state) less the tip credit is the least the employer can pay tipped employees per hour. If an employee doesn’t make enough in tips during a given workweek to earn at least the applicable minimum wage for each hour worked, the employer has to pay the difference.

Michigan law allows employers to claim a tip credit, as long as they inform employees beforehand. In 2018, employers must pay tipped employees at least $3.52 an hour. This means that employers may take a tip credit of up to $5.73 an hour, as long as the employee makes at least $9.25 an hour with tips.

Some employees have dual jobs, in which they spend some of their shift doing non-tipped work. Under federal law, if an employee spends more than 20% of the workweek doing non-tipped duties, the employer may not take a tip credit for those hours. For example, a waitress spends five hours of her shift waiting tables; she spends her remaining time cleaning the restaurant after customers leave, taking inventory, and doing other work for which she doesn't receive tips. The employer must pay her the full minimum wage, without taking a tip credit, for those three hours. It can claim a tip credit for her five hours of work waiting tables.

Tip Pooling

Many states allow employers to require tip pooling or “tipping out.” All employees subject to the pool have to chip in a portion of their tips, which are then divided among a group of employees. An employee must be able to keep at least the full minimum wage. (In other words, if the employer takes a tip credit, the employer can count only the tips the employee gets to take home against its minimum wage obligation.)

According to the federal Department of Labor, only employees who regularly receive tips can be part of the pool. Employees must receive notice of the tip pool. Employees can't be required to share their tips with employees who don't usually receive their own tips, like dishwashers or cooks. And no employers are allowed in the pool: Tips from a tip pool can't go to the employer or, in some states, managers or supervisors.

What Counts as a Tip?

It's not as easy as you might think to figure out exactly how much of what a customer pays is a "tip." If the customer pays in cash and tipping is voluntary, whatever amount the customer leaves over and above the charge for products or services (plus tax) is a tip. However, if the employer imposes a mandatory service charge, or the customer pays by credit card, the rules might be different.

Mandatory Service Charges

Some restaurants tack a “mandatory service charge” on to bills for large tables of diners, private parties, or catered events. Under federal law and in most states, this isn't considered a tip. Even if the customer thinks that money is going to you and doesn't leave anything extra on the table, your employer can keep any money designated as a "service charge." The law generally considers this part of the contract between the patron and the establishment, not a voluntary acknowledgment of good service by an employee. Many employers give at least part of these service charges to employees, but that's the employer's choice: Employees have no legal right to that money.

A couple of states have different rules, intended to make sure that customers know whether their money is going to the employer or the server. Michigan law is not one of them, however.

A 2014 rule change by the Internal Revenue Service has created a significant incentive for employers to stop imposing mandatory service charges, if the employer hands any of that money over to employees. Any portion of a mandatory service charge that the employer pays out to employees must be treated as wages, not tips. This means the employer must withhold and pay Social Security and Medicare (FICA) tax on these amounts, may not claim a credit against its tax obligations for these amounts (as it can for tips), and must include them as part of the employee’s hourly wage when determining overtime payments, among other things.

The rule applies only to mandatory service charges. For the amount to count as a tip rather than a service charge, all of the following must be true:

The payment must be entirely voluntary

The customer must have the unrestricted right to determine the amount

The amount cannot be set by employer policy or subject to negotiation with the employer.

The customer must have the right to determine who receives the payment.

Credit Card Charges

State rules differ as to whether employees are entitled to the full amount of a tip left by credit card. If the employer has to pay the credit card company a processing fee, some states allow the employer to subtract a proportionate amount of the tip to cover the employee’s “share” of the fee. For example, if the credit card company charges a 3% fee, the employer could legally reduce the employee’s tip by 3% as well.